Xylem: A Safe Haven From Global Uncertainty

• Xylem Inc XYL shares have been declining steadily since the beginning of the year, and are down 18 percent year-to-date.
• Stifel’s Nathan Jones upgraded the rating for the company from Hold to Buy, while establishing a price target of $37.
• Although Xylem’s shares have been on a downturn, Jones said that the company’s fundamentals remain unchanged.

Analyst Nathan Jones believes that Xylem could generate EPS growth at a CAGR of about 20 percent over the next few years. “We believe strengthening fundamentals in Public Utility and a bottoming of industrial headwinds will enable Xylem to grow revenue in the mid-single digits over the next several years.”

Jones expects SG&A leverage or reduction of 200bps and leverage on volume and mix improvements to drive margin expansion of 340bps over the next four years. “Revenue growth and margin improvements forecast to grow EPS organically in the low double digits,” he added.

Xylem could generate about $1 billion of FCF, after dividends, over the forthcoming 3 years. Jones believes the company has the capacity to add another ~9 percent EPS growth annually if it uses available capital to repurchase shares.

In the report Stifel noted, “While not immune from concerns over commodity volatility/FX/China/slowing global growth, we believe Xylem is largely insulated from concerns creating volatility in the market.”

Xylem’s shares are down 15.5 percent since May 1, as compared to a 7.6 percent decline in the S&P500. Jones believes that this pullback has created a “compelling opportunity for investors to buy a high quality company with a strong fundamental outlook at an unwarranted discount.”